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Could Hewlett Packard Enterprise Beat Analyst Estimates in 4Q17?

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Part 6
Could Hewlett Packard Enterprise Beat Analyst Estimates in 4Q17? PART 6 OF 11

What’s behind HPE’s Profit Margins

HPE’s operating margins stood at 8.4% in 3Q17

In fiscal 3Q17, Hewlett Packard Enterprise’s (HPE) non-GAAP (generally accepted accounting principles) operating margin was 8.4%. The Software segment had an operating margin of ~25%, followed by Enterprise Group at 9.3% and Financial Services at 7.8%. Peers NetApp (NTAP), IBM (IBM), and Nokia (NOK) had operating margins of 9%, 16.4%, and 9.2%, respectively, at the end of their last reported fiscal quarters.

What&#8217;s behind HPE&#8217;s Profit Margins

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To improve profit margins and offset the impact of high commodity prices, HPE announced cost savings of between $200 million and $300 million in the second half of fiscal 2017. HPE’s operating profit improved by 60 basis points in 3Q17 from 7.8% in 2Q17.

During the Deutsche Bank (DB) Technology Conference in September 2017, HPE chief financial officer Tim Stonesifer stated that “we’re making very good traction on that cost take-out, and that is more than offsetting some of the pressure we’re seeing on stranded costs given the fact that we’ve a full quarter now, VS, and some of the short-term dilution on the recent acquisitions.” HPE expects its profit margins to improve further quarter-over-quarter in 4Q17, and expects an operating margin of 11% for Enterprise Group.

HPE passing approximately 50% of commodity costs

HPE’s stranded costs are expected to be eliminated in fiscal 2017, which, coupled with short-term dilution, might provide tailwinds for the company in terms of profit margin improvement in fiscal 2018 and beyond. Additionally, HPE is passing around 50% of commodity costs to offset increasing prices. HPE expects profits to be impacted by $400 million–$500 million in fiscal 2018 due to pricing pressures.

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